By John A Raju:
Bitcoins have been in the news for desirable, unreasonable and intriguing reasons for quite some time now. Quite a few articles & opinions are being written on it. But what is this relatively new phenomenon? Is it a gold nugget or garbage or a bit of both among the plethora of new stuff coming up on the virtual world right now?
Wikipedia describes Bitcoins as “a peer to peer payment network & digital currency based on an open source protocol, which makes use of a public transaction log”. All this jargon might be better understood by computer geeks but what it basically means is that Bitcoins is a virtual currency, its control is decentralized i.e. there is no central authority controlling its generation and use, thus making it free from external control and it uses a public transaction log, which is like a huge database which verifies payments and ensures there are no instances of double spending. This huge database is maintained and run by “miners”, who generate the currency and earn bitcoins as well.
The idea of bitcoins came in a scientific paper published under the pseudonym Satoshi Nakamoto. He combined existing knowledge of networking with his own ideas of an inflation proof mechanism and the incentivising feature to create a new electronic cash system.
Its standout features and prominent advantages include encryption enabled anonymity, absence of government/central bank control and is also the cheapest means of transferring cash. What acts as a boon on one side also turns out to be a bane on the other as the above mentioned features are exactly what would aid the black market, money launderers, drug dealers and all such illegal operations. The Silk Route saga is a testimony to this. Silk Route was an online marketplace for illegal drugs which was shut down by the US government, which had extensively used bitcoins to aid its evasion of the government radar. However, the critics say that constant stigmatizing of the Bitcoins with this scandal is unfortunate. Illegal trade and black marketing is carried out even with US currency, but that doesn’t mean we stop the minting of dollar bills, right?
How did the bitcoin use gain prominence? Well it all started with the Cyprus crisis of 2009. With all the inflation ravaging around during the time, Cyprus too experienced a financial crisis (as was the norm for most countries then). This resulted in an unexpected 10% tax on those who had assets of 100,000 euros or more in the bank. With the threat of their earnings falling in government hands, many sought ways to stash away their cash and stumbled upon the nascent Bitcoin. What you basically have to do to earn bitcoins is to create an account in MtGox.com and wire money to it. Based on the exchange rate, you get to purchase bitcoins, and here comes the catch.
The exchange rate of bitcoins can fluctuate erratically. This is because the value of bitcoins isn’t centrally controlled i.e. its value & exchange rate depends on the willingness of other users to buy the bitcoins. During peak demand periods, a bitcoin touched highs of $266 and just as well plummeted to $65 when the demand waned. In this regard, bitcoins behave somewhat like stocks to an extent. This is because of the inherent inflation proof mechanism. The total number of bitcoins in circulation can only be 21 million at a time. So if you are mining bitcoins and there is a huge demand for them, your contribution to the total bitcoin number is reduced. This reduces your savings. On the contrary, you could just as well strike gold when the demand is low but your share to the bitcoin production is larger.
The erratic nature, however, hasn’t prevented popular sites like Reddit and wordpress from accepting it as legal tender. However, its propensity to be used for criminal activities has made governments wary. That even the government requires some perseverance to snoop into bitcoin transactions shows the strength of its encryption programme. Like any financial medium of transactions, especially digital ones, there is huge potential for misuse of this technology and many countries are against its use. The largest private company aimed at making bitcoins more accessible, easy to use and safer is situated in Cyprus, yet the Central Bank of Cyprus or CBC has labeled bitcoins as dangerous. China has issued notices to all its financial institutions stating that bitcoins are no longer recognised as legal tender and cannot be used for financial transactions.
Despite all the whining about the dangers & risks of using bitcoins, there is no denying that this is a futuristic form of currency. In a world where everything is going virtual, a currency that can ride the waves of inflation and recession, circumvent capital controls and counter international sanctions, is an ultra-superior financial weapon. The weapon may be double edged as any new and progressive endeavour will be. However, I believe that researching, refining and revamping this young virtual soldier can make it a potent and very useful giant in the future.